As the recession drags on, the policymaking arm of the Federal Reserve will offer its insights into the state of the economy Wednesday, in the wake of a dismal first quarter GDP report that revealed a 6.1 percent rate of contraction in the first three months of 2009.
There is no doubt among the majority of economists that the Federal Open Market Committee plans to keep its key interest rate at a target range between 0 and 0.25 percent, reflecting its pledge to keep interest rates low for some time as it continues efforts to restore credit flow. However, some analysts see the funds target range narrowing to 0 and 0.13 percent.
At its previous meeting, the FOMC announced that, in addition to leaving its target range unchanged between 0 and 0.25 percent, it will purchase up to $300 billion in longer term treasuries in order to boost its balance sheet - which is expected to grow by $750 billion to over $1.25 trillion. Since then the Fed has begun to purchase to $300 billion in longer-term treasury securities over the next six months, an effort to boost the Treasury's balance sheet.
The FOMC is likely take comfort in what has occurred since their last meeting where they took the daring move of deciding to buy treasuries to manipulate the level of longer term interest rates, Peter Boockvar, and Equity Strategist at Miller Tabak + Co., LLC., said in a note.
Boockvar noted that markets reacted positively to the Fed's decision.
After rallying $70 the day of that meeting, gold has given it all back, the CRB index is unchanged, oil is flat, the S&P's are up about 10%, the average 30 yr mortgage rate has fallen to 4.62% from 4.89%, LIBOR is down to 1.03% from 1.29%, and the KDP high yield index is down almost 200 bps, he said.
However, if the FOMC doesn't boost the size of its treasury purchase Wednesday, he warned that markets could react negatively.
While Boockvar predicts that the Fed will take comfort, Marc Pado of Cantor Fitzgerald foresees a quieter announcement, stating in a note that the Federal Reserve will do nothing, see nothing, and say nothing.
They won't want to come off as sounding like they are ready to take a victory lap, he wrote. They also don't want to sound like the economic recession is about to get worse.
Specifically, he noted that banks are still meeting with the Treasury in regards to the stress tests that were conducted in late February. Banks were notified of the results privately, and the stress tests outcomes will be made public on May 4th.
Still, despite some lingering concerns, the economy does appear to be improving - albeit at a slower pace than originally forecast.
Chris Low, the chief economist at FTN Financial, noted that the Fed meeting today is the first in more than a year in which the FOMC faces an improving economy.
No one expects the Fed to change the funds rate, but there could be some fine tuning of the quantitative easing program and an acknowledgement of a quickening of the economy, he added.
Quantitative easing, most notably used by the Bank of Japan in the early 2000s, is when a central bank creates a certain amount of money out of thin air. The Federal Reserve did this at their last meeting through its purchase of treasuries. The money is injected into the private banks, allowing them to lend and theoretically increasing the credit flow.
However, GDP fell at a 6.1 percent annual rate in the first quarter, a sharper decline than the 4.7 percent expected but softer than the 6.3 percent drop in the fourth quarter of last year.
The surprise was not in inventories, where people figured the downside risk was this quarter, Low explained. Rather, it was in business fixed investment, residential investment and government spending, all of which fell more than expected.
The Federal Open Market Committee, the Fed's rate-setting body, will release its statement at 2:15 pm ET, signifying the conclusion of the 2-day meeting.
For comments and feedback: contact firstname.lastname@example.org